FUND COMMENTARY
The benefits of short-term with Thrivent Short-Term Bond Fund
03/25/2025
Key points
High interest rates
The high interest rate market is a great opportunity for investors to explore short maturity bonds.
Risk adverse
Consider a shorter duration asset that doesn’t have the same risk profile as owning something that’s 10 or 30 years long.
With backgrounds on the sell side and strong interests in math, it shouldn’t come as a surprise that both Cortney Swensen and JP Gagne switched to the buy side as fund managers for Thrivent Short-Term Bond Fund (THLIX).
“After earning my MBA, I worked on the sell side for a year, and quickly determined that the buy side was a better place for me with my math background in my previous career as an engineer,” said Swensen, who has managed the fund since 2020.
Gagne joined Swensen as a co-manager just a year later. “I've always had a strong math and analytical background, and I always used it in my own personal investing that I wanted to take to the institutional side for other investors,” he said. “I've loved every minute of it, and I've loved every challenge that's come with it.”
Swensen focuses on the corporate credit portion of the Fund. She looks for investment-grade corporates and high-quality, high yield. Gagne focuses on securitized bonds backed by interest-bearing loans like auto loans, student loans and mortgages.
Benefits of short-term investing
The current higher interest rate market is a great opportunity for investors to explore short maturity bonds, especially with the U.S. Treasury curve still fairly flat. The current difference between investing in 2-year U.S. Treasuries versus 10-year U.S. Treasuries is only 0.22%. With uncertainty around what the U.S. Federal Reserve (Fed) next move may be, the market is likely to continue to see very high volatility in interest rates. The Fund offers short duration fixed income exposure, making it less sensitive to interest rate changes, while still taking advantage of the higher rates.
Duration is a measure of a portfolio’s sensitivity to changes in interest rates; the longer the portfolio’s duration, the more sensitive it is. Also, the longer the duration, the greater potential risk or reward.
“The demand for short-term investments is driven by the shape of the yield curve right now,” Gagne said. “October 2022 was the first time we saw the yield curve invert during this cycle. What that means is that the 2-year yield is higher than the 10-year yield point of the curve. Although the yield curve normalized in September 2024, with very little slope to the curve, you can still find very attractive yields without having to take on much interest rate risk during a period of a lot of uncertainty around tariffs, inflation and the economy.”
Interest rate changes
Quickly rising interest rates through 2023 combined with dropping rates in 2024 and potential for more in 2025 keep Swensen and Gagne active in the Fund.
“As the market and interest rates continue to change, the biggest tool that we have is managing to a duration,” Gagne said. “In 2022 and 2023, when we knew that interest rates were going to continue to go higher as the Fed was hiking, we ran the portfolio shorter than our peers. We had more investments in the 1- to 2-year area and less in the 4- to 5-year area. Now, as the Fed is done hiking, we positioned the portfolio to be more nimble and duration-neutral. Therefore, it gives us the ability to adjust our investments as we see fit and as we get more clarity on what the Fed is going to do.
“Even though the Fed cut rates in 2024, with the new administration in the White House and concerns around tariffs’ impact on inflation, the consensus now is that the Fed will pause and wait to see what happens as the year plays out,” Gagne added. “Thus, the new market consensus does appear to be higher rates for longer. With this uncertainty in inflation and interest rates, Thrivent Short-Term Bond Fund is a great place to continue to lock in current yields without taking much interest rate risk.”
Strategizing the portfolio
There are many steps Swensen and Gagne take before selecting bonds they want to own in the Fund.
“The strategy of choosing bonds on the corporate side is really a bottoms-up approach that starts with the research teams,” Swensen said. “The research teams are a group of experienced analysts on both the investment grade and the high yield side. Analysts recommend whether to buy or sell individual companies within their sectors. Then we as portfolio managers decide what to invest in across those sectors.”
“When choosing specific bonds in the securitized market, we approach it much like the investment grade side,” Gagne said. “We utilize our research team to underwrite every single deal that we look at and to do the analysis to make sure that we are principally protected, because our No. 1 goal for this portfolio is to get principal back for our investors.”
Managing risk
In addition to monitoring how interest rates affect the Fund, Swensen and Gagne also look closely at risk factors.
“Managing risk is a primary focus of the fund,” Swensen said. “Bonds have an asymmetric risk profile. While principal loss is very rare in the investment grade market, it does occur. So first and foremost, our research teams are monitoring our holdings for new information that might change our opinion of a credit. We as portfolio managers sell any investments in which our core thesis has changed in a significantly negative way.
“Our risk buckets are something we talk about and collaborate on,” Swensen continued. “We ask ourselves, ‘How much risk do we want in the portfolio and what is that risk to be comprised of?’ and ‘Do we want more corporate exposure or more securitized exposure at any one point in time based on our economic outlook or market conditions?’ And also, ‘How much risk-free exposure or Treasuries do we want in the Fund at any given time?’”
“Typically, there is additional spread in the securitized market and that comes from the structural and the prepayment risk that investors take,” added Gagne. “In this portfolio, we try to target AAA rated and the most senior bonds to avoid any extension and default risk.”
Fitting short-term bonds into a portfolio
Swensen says Thrivent Short-Term Bond Fund may be good for investors who are comfortable with some duration risk, but not to the extreme of potential price fluctuations that longer maturity bond funds would have.
“Consistency is paramount for those investing in the Fund,” Gagne said. “We take a lot of pride in historically having a lower-than-average volatility and a higher-than-average return versus our peer group.”
Past performance is not necessarily indicative of future results.
All information and representations herein are as of 02/18/2025, unless otherwise noted.
Prior to 02/28/2025, the fund was named Thrivent Limited Maturity Bond Fund
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
U.S. government securities may not be fully guaranteed by the U.S government and issues may not have the funds to meet their payment obligations. The value of U.S. government securities may be affected by changes in credit ratings, which may be negatively impacted by rising national debt. The value of mortgage-related and other asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. In addition to typical risks associated with fixed income and asset-backed securities, collateralized debt obligations are subject to additional risks. Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. The use of futures contracts involves additional risks such as a loss in value in the underlying instrument, which could decrease the Fund’s value. High yield securities are subject to increased credit risk as well as liquidity risk. The Adviser’s assessment of investments may prove incorrect, resulting in losses or poor performance. The Fund’s value is influenced by the performance of the broader market and by factors specific to an issuer within the Fund. When bond inventories are low in relation to the market size, there is the potential for decreased liquidity and increased price volatility. In unusual circumstances, the Fund could experience a loss when selling portfolio securities to meet redemption requests for a variety of reasons. These and other risks are described in the prospectus.
Thrivent Short-Term Bond Fund Top 10 Holdings as of 1/31/2025: U.S. Treasury Notes with 01/31/2028 maturity: 4.17%, U.S. Treasury Notes with 10/31/2029 maturity: 1.87%, Federal National Mortgage Association Conventional 30-Yr. Pass Through with 2/1/2055 maturity: 0.79%, Avis Budget Rental Car Funding AESOP, LLC with 4/20/2029 maturity: 0.57%, Pagaya Al Debt Grantor Trust with 7/15/2032 maturity: 0.56%, PPM CLO 2, Ltd with 4/16/2037 maturity: 0.50%, AMSR Trust with 12/17/2038 maturity: 0.46%, OneMain Financial Issuance Trust with 9/14/2035 maturity: 0.46%, CAFL Issuer, LLC with 03/28/2029 maturity: 0.45% and Tricon Residential Trust with 07/17/2038 maturity: 0.44%.